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The new medium of exchange

Cryptocurrencies ‘and blockchain assets are the newest ‘and potentially most promising new asset class.


The Rotary Club of Eldoret, where I am a member, played host to a talk titled “Cryptocurrencies: Myths, Facts, Figures ‘and Future”. As I took to the stage to speak, I could see the faces of attendees, fully packed in our small Rotary meeting place, pregnant with expectation ‘and questions of what Cryptocurrencies hold for them ‘and the future.

I shot the first question: “By show of h ‘ands, how many have heard about Bitcoins?”Many h ‘ands rose.

“How many know about Bitcoins?” Fewer h ‘ands shot up. Only one h ‘and rose when I asked how many owned Bitcoins.

These basic statistics represent the Kenyan climate as concerns cryptocurrencies. They are being talked of in hush tones, some calling them pyramid schemes or a hoax ‘and others calling them a well-established scam on the internet.

Cryptocurrencies are gradually being discovered in Africa. In countries like South Africa, Ghana, Kenya, Botswana, Zimbabwe ‘and Nigeria, there is a semblance of digital currencies, primarily bitcoin, taking roots. Dr. Bitange Ndemo in the Business Daily of 11th August 2017 penned down his thoughts in an article titled, “Forget L ‘and ‘and Invest in Digital Currencies”. This clearly shows the trajectory in which Kenyans in the years to come will be diversifying their investments.

Wave of disruptions

If you told someone 50 years ago that you could do your entire job regardless of global location, they wouldn’t be able to imagine it. We now know of location agnosticism.

Think about the many disruptions that have occurred since the invention of paper – the type writer, the PC, the Internet, the smartphone, social media, artificial intelligence ‘and now big data ‘and Internet of Things (IoTs). These have left in their wake many companies fallen by the wayside ‘and creation of new products, companies ‘and markets.

In Kenya, practically every terminal – including taxi drivers – now accept cashless payment through M-Pesa. This trend is consistent with a global one that favours electronic money ‘and digital payments over paper currency. Mobile money has allowed Africa to bypass conventional Western structures to embark upon an alternate form of digital currency.

Demystifying Cryptocurrencies

Digital currency was first perceived as a risky way to conduct transactions. It is ironic that today digital currency is increasingly preferred over paper money. Card swiping is gradually disappearing in the US ‘and UK where touchless forms of electronic payment are preferred. For example, coffee chain Starbucks prefers customers to scan their phones at the terminal to make payments.

A cryptocurrency is defined as a digital asset designed to work as a medium of exchange, using cryptography to secure the transactions ‘and to control the creation of additional units of the currency. Bitcoin became the first decentralised cryptocurrency in 2009.

Blockchain is a continuously growing list of records, called blocks, which are linked ‘and secured using cryptography. Each block typically contains a hash pointer as a link to a previous block, a timestamp ‘and transaction data. Functionally, a blockchain can serve as “an open, distributed ledger that can record transactions between two parties efficiently ‘and in a verifiable ‘and permanent way.

Where do bitcoins come from? With paper money, a government decides when to print ‘and distribute money. Bitcoin doesn’t have a central government. Therefore, miners use special software to solve math problems ‘and are issued a certain number of bitcoins in exchange. This currently st ‘ands at 12.5 BTC. This provides a smart way to issue the currency ‘and also creates an incentive for more people to mine. Like gold, bitcoins are a finite resource ‘and its mining will end once 21 million bitcoins have been mined. Currently, we are at around 13.5 million BTC mined since its inception in 2009 by its founder ‘and inventor Satoshi Nakamoto.

The argument for cryptocurrencies

Cryptocurrencies ‘and blockchain assets are the newest ‘and potentially most promising new asset class.

Investment returns in cryptocurrencies for 2017 have by far outperformed traditional assets such as global stocks ‘and bonds. The Lawnmower Blockchain Index, the premier gauge of performance for the blockchain asset class, is up +374 per cent versus the world primary equity indices at +15.7 per cent ‘and +3.95 per cent for bonds. On the prices front, Coindesk puts 1 Bitcon at USD4,226 ‘and 1 Etherium USD321.

However, public opinion ‘and investors’ minds on cryptocurrencies are divided ‘and it often comes down to a philosophical ‘and even emotional debate. This is also true about African policymakers ‘and their official stance on cryptocurrency. The Central Bank of Kenya issued warning on the use of unregulated cryptocurrencies in late 2015.

The cryptocurrency-based blockchain economy is an asset-based economy, while the fractional reserve banking system, based on fiat currency, is a debt-based system.

High volatility ‘and unexplained falls, risks of hacking attacks ‘and ransom with the subsequent sensational media headlines are reasons why many investors still shy away from cryptocurrencies ‘and merely think of it as “magical internet money.”

In a free decentralised global market where volatility is not suppressed by trillions of central bank-created quantitative easing, the market becomes more volatile as it becomes more efficient, acting faster to information changes.

The biggest fallacy many casual observers ‘and some government officials have is that they say they like blockchain but do not like cryptocurrencies like Bitcoin, Bitcoin cash, Ether ‘and Litecoin. That argument is the same as people in 1994 arguing that they do not like the public censor-free internet (it is not regulated ‘and not “owned” by anybody) but want a privately controlled intranet. A private blockchain without a trustless ‘and distributed consensus-based cryptocurrency is nothing more than a shared database or intranet.

The next big thing

Proponents of cryptocurrencies believe blockchain could soon give rise to a new era of the internet even more disruptive ‘and transformative than the current one. Blockchain’s ability to generate unprecedented opportunities to create ‘and trade value in society via cryptocurrencies will lead to a generational shift in the internet’s evolution, from an internet of information to a new generation internet of value. Any government that embraces cryptocurrencies is going to benefit so much by owning the money that is native to the internet.

Cryptocurrencies are native to how code works. If one country cracks down on Bitcoin ‘and cryptocurrencies protocol it will be driving out innovation.

Just like the internet took out Hollywood with Netflix, Spotify took out the music business, ‘and Google ‘and Facebook took out advertising ‘and media businesses, cryptocurrencies will take out the finance industry as we know it.

Where, when ‘and how to invest

There is high potential for Kenyans to leapfrog some of the existing financial services, in the same way that many Kenyans skipped the part of owning a cumbersome ‘and expensive l ‘andline ‘and went straight to owning a mobile phone.

In nations that lack dependable economic systems or governance, digital currency may offer hope. Access to finances, security ‘and privacy of funds, ‘and faith in a common medium of exchange, can aid many across Africa.

Several African countries have exchanges ‘and startups in the crypto space, ‘and their businesses are recognising the significance of cryptocurrencies in fostering cross-border trade ‘and payment. Moreover, the infrastructure for the take-off of digital tokens is solid.

The new finance industry will settle on where the innovation will be for smart contracts ‘and cryptocurrencies. It will position African economies for the future of finance. Africa not having a strong legacy system in place, as is the case with the developed world, is suddenly a great advantage.

M-Pesa’s success has shown that Microsoft founder Bill Gates’ adage of “Banking as a function is necessary, Banks are not,” holds true. What M-Pesa achieved on a country scale, cryptocurrency can achieve on a pan-African scale.

Its use

Cryptocurrency remittance services in Africa have sprung up as an alternative to Western Union ‘and international organisations have employed blockchain technology to assist refugees. Still, it appears that many of the communities most desperate for this innovation have yet to embrace the monetary haven.

Countries with high inflation ‘and currency controls in place seem to be paranoid about the rise of cryptocurrency. However, similar to the internet, it is difficult to ban or control.

Over the past 12 months, the African market has seen the emergence of more than 10 Bitcoin exchanges seeking to provide cheap ‘and efficient trading services. In East Africa, innovators have introduced cryptocurrency systems to support cross-border transactions, as exemplified by initiatives like BitPesa ‘and Belfrics Ltd.

Africa has lots to offer Bitcoin ‘and other cryptocurrencies, simply because the continent needs an alternative to the weak ‘and not-always-available or reliable local African fiat money.

Cryptocurrency is not just a solution to the plight of the ‘unbanked’. Rather, it is a method for allowing economically or politically subjugated populations to control their own wealth. Non-fiat digital currency can bring millions of people into a secure ‘and person-driven global economy.

Like any other investments, cryptocurrencies carry risks. However, not owning or embracing the native money of the internet is even riskier.

“To succeed, jump as quickly at opportunities as you do at conclusions.” Benjamin Franklin

The writer is an ICT Consultant, Speaker ‘and Author based in Moi University


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